Softening apartment rents, particularly in the massively over-priced, millennial safe-spaces of New York City and San Francisco, have been a frequent topic of conversation for us over the past several quarters...here are just a couple of recent examples:
- NYC Real Estate Bubble Bursts As Apartment Sales Crash 20%
- New York Real Estate Prices Plunge In 4Q As Listing Days and Discounts Soar
- San Fran Home Sales Crash To Lowest Level Since 2008 As Pricing Reset Gets Underway
- "It's About Time For Recession" Property Manager Warns As Rents Drop "For First Time In Career"
Now, a new report from Goldman's Credit Strategy Team, led by Marty Young, helps to highlight some of the key data points that suggest that sinking rent will likely not be just an ephemeral problem.
To start, an just like almost any bubble, sinking rents are the symptom of a massive, multi-year supply bubble in multi-family housing units sparked by, among other things, cheap borrowing costs for commercial builders. Per the chart below, multi-family units under construction is now at record highs and have eclipsed the previous bubble peak by nearly 40%.
Rents have already started to rollover but we suspect the correction has only just begun.
And while much of the rent compression has come in high-cost and commodity-exposed regions...
- Rent growth appears particularly challenged in then highest cost areas. San Francisco, CA, San Mateo, CA and New York, NY counties have seen negative rent growth over the past year, while more moderately priced counties have tended to have stronger rent growth.
- Regions exposed to commodity sector pressures –n including oil and coal – are also seeing weaker rent growth. Apartment rents in the Houston, TX MSA fell over the past year, while rents in Dallas, TX grew.
...per the chart below, dozens of low-cost markets are also starting to experience substantial rent declines.
Of course, despite all the warning signs for multi-family projects, not to mention the recent slew of retail bankruptcies which are about to flood the market with vacant commercial real estate, investors just can't seem to get enough CMBX to satisfy their demand for 'juicy' 450 bps spreads.